Reform Opens Italy to Growth

Ten years ago, the heavily regulated Italian banking system was marked by tough entry barriers and sharp restrictions on branching.

But times have changed. These days, sweeping reform of the country's financial-services sector promises plenty of opportunities for domestic and foreign banks alike.

Under reform legislation, some Italian banks already are cross-selling insurance, mutual funds, and mortgages, and merging in hopes of weighing in as world-class players. But analysts said deregulation also may enable larger foreign competitors to gain market share in an acutely underbanked market.

Alliances Being Formed

The Italian market "offers great incentives for other European banks to enter," according to Salomon Brothers International in London. Some foreigners are gaining a toehold by forming strategic alliances with local institutions.

"You could call Italy the last banking frontier left in Western Europe," said William Vincent, an analyst at UBS Phillips & Drew, a Swiss-owned brokerage firm.

The Amato law, named after a former Italian treasury minister, last year laid the groundwork for reform in the country's state-owned banking sector. Under deregulation, state and commercial banks are authorized to take a wider role as intermediaries in the country's stock and securities markets.

State Banks Are Dominant

The new regulations aim partly to privatize the nine state banks. Under the laws, these institutions are free to sell shares of stock to the public, although Milan plans to retain a 51% interest.

The state banks - including such institutions as Banco di Napoli and Banca Nazionale del Lavoro - account for more than half the banking system's total assets.

Banca Nazionale, Italy's largest bank, has assets of $137.71 billion (see table on this page).

Four large banks - Banca Commerciale Italiana, Credito Italiano, Banca di Roma and Banca Nazionale - are controlled by IRI, the state industrial holding company.

Consolidation

In line with the new regulatory framework, some Italian banks are muscling up through mergers. Earlier this year, Cassa di Risparmio di Roma wrapped up a consolidation with Banco di Santo Spirito.

With the subsequent acquisition of a 65% stake in Banco di Roma, this new combination has some 900 branches and deposits of $7.7 billion. In the last two years, some 20 industry combinations have been completed, although none has been comparable in size to the Cassa di Risparmio deal.

Impact of Merger

"The restructuring of Italian banking is under way," said Cesare Geronzi, director general of Cassa di Risparmio di Roma, commenting on the merger.

Giuseppe Greco, managing director of Banco di Roma, predicted that in the wake of deregulation, the domestic financial-services markets "will comprise a few prime nationwide multifunctional banking groups of international standing." That will be matched by a "large number of smaller banks with closely knit branch networks in their own regional areas," he said.

Meanwhile, deregulation in Italy also may prove appealing to foreign banks. Salomon Brothers noted the country's relative dearth of branches, the inefficiency of many of its financial institutions, and a lack of development in key product markets.

Foreign Presence Small

According to Bank of Italy, 36 foreign participants have combined assets of $150 billion, or 11.8% of the country's total. But analysts suggest that making further headway in the market will require substantial investment and staying power.

In recent years, Lloyds Bank, Wells Fargo, Chemical Bank, First Chicago, and Hongkong and Shanghai Banking Corp. all have pulled out of Italy, citing a lack of profits in wholesale banking.

As a result, some foreign banks are entering strategic alliances with domestic banks, under which they are striking operational and product agreements. In some cases, the agreements are supported by cross-shareholding pacts.

Several such accords already have been settled, including those between Austria's Creditanstalt and Banco Genimiano; Japan's Mitsui Taiyo-Kobe and Monte dei Paschi; and Spain's Banco Santander with Cariplo.

Changes Coming for Banks

In a drive to become more competitive, many of Italy's nonstate banks are expected to modernize outdated infrastructures, slash costs, and shoot for additional penetration in their home market.

For one thing, many Italian banks are dwarfed in comparison to larger European players. In terms of assets, the nation's biggest bank - Banca Commerciale Italiana - ranks as just the 15th largest in Europe.

Moreover, the three best capitalized Italian banks - Istituto Bancario San Paolo di Torino, Monte dei Paschi, and Cariplo - last year accounted for 25% of the country's total banking assets. By contrast, France's three most heavily capitalized banks accounted for 42% of French banking assets; in Britain, the top three claimed a 56% share.

Shortage of Branches

Other data show the Italian system also is woefully underbranched. Each of the country's 16,000 bank branches serves an average of 3,729 people. The figure in Spain, Germany, France, and Britain is about 1,847 people.

And costwise, Italian banks are inefficient. According to the Paris-based Organization for Economic Cooperation and Development, Italy's banks have an average cost-income ratio of 70.1%. The figure elsewhere in Europe is less than 66%.

Technology Lag

Italy also comes up short in the distribution of some modern banking products and technologies. The average population per ATM outlet is 12,975 customers. That compares with 8,147 in Germany, 4,760 in France, and 4,540 in Britain.

In addition, while some 4.5 million credit cards are circulating in the country, Salomon Brothers calculated a potential saturation level of up to 68 million. Thus far, card growth has been hamstrung by minimal retailer acceptance, a continuing preference for cash by consumers, and high national savings ratios.

Branch Deposits

Each Italian branch has an average of $26 million of deposits. Analysts and bankers maintain these deposits can be leveraged to generate new revenues.

In Britain, each branch has about $16 million of deposits. In Germany, the figure is $14 million; in France, $12 million.

Under the Amato laws, over five years ending in 1995, some $140 million of state funds will be made available to recapitalize the state banks. Much of the fresh capital is expected to be channeled to troubled institutions, such as Banca Nazionale del Lavoro.

Pending legislation - including a liberalization of branching - also would affect Italy's 1,100 smaller commercial and savings banks, and cooperative institutions.

In the past six months, there have been 3,800 applications to open new branches, Bank of Italy said.

PHOTO : Italy's Top Five

PHOTO : An Underbanked Market Customers per branch Source: Salomon Brothers International

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